11-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 11-K
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(Mark One): |
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ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For the transition period from ___ to ___ |
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Commission file number 0-11330 |
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A.
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Paychex, Inc. 401(k)
Incentive Retirement Plan
(Full title of the Plan) |
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B.
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Paychex, Inc.
911 Panorama Trail South
Rochester, NY 14625
(Name of issuer of the securities held pursuant to the
Plan and the address of its principal executive office) |
1
Index to Financial Statements, Schedules and Exhibits
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| Financial Statements |
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Page No. |
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Report of Independent Registered Public Accounting Firm
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Statement
of Net Assets Available for Benefits
December 31, 2005 and 2004
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Statement
of Changes in Net Assets Available for Benefits
For the Years Ended December 31, 2005 and 2004
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Notes to Financial Statements
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Schedules |
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Schedule
H, Line 4i — Schedule of Assets (Held at End of Year)
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Exhibits |
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23 — Consent of Independent Registered Public Accounting Firm
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12 |
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SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Committee
has duly caused this Annual Report to be signed on its behalf by the undersigned hereunto duly
authorized.
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Dated: June 23, 2006 |
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PAYCHEX, INC. 401(k) INCENTIVE
RETIREMENT PLAN
(Name of Plan) |
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/s/ Toby Cherry |
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Toby Cherry
401(k) Committee Member |
2
Report of Independent Registered Public Accounting Firm
The Plan Committee
Paychex, Inc. 401(k)
Incentive Retirement Plan
Rochester, New York 14625
We have audited the accompanying statements of net assets available for benefits of the Paychex,
Inc. 401(k) Incentive Retirement Plan (the Plan) as of December 31, 2005 and 2004, and the related
statements of changes in net assets available for benefits for the years then ended. These
financial statements are the responsibility of the Plan’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Plan’s internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Plan’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the net assets available for benefits of the Plan at December 31, 2005 and 2004, and the
changes in its net assets available for benefits for the years then ended, in conformity with U.S.
generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the financial statements taken
as a whole. The accompanying supplemental schedule of assets (held at end of year) as of December
31, 2005 is presented for purposes of additional analysis and is not a required part of the
financial statements but is supplementary information required by the Department of Labor’s Rules
and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental
schedule has been subjected to the auditing procedures applied in our audits of the financial
statements and, in our opinion, is fairly stated in all material respects in relation to the
financial statements taken as a whole.
/s/ Ernst & Young LLP
May 25, 2006
Cleveland, Ohio
3
PAYCHEX, INC. 401(k) INCENTIVE RETIREMENT PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
(In Thousands)
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December 31, |
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2005 |
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2004 |
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Assets |
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Cash |
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$ |
5,254 |
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$ |
3,845 |
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Investments (at fair value): |
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Paychex ESOP Stock Fund |
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203,877 |
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191,042 |
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AIM Basic Value Fund |
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16,855 |
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14,550 |
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AIM International Growth Fund |
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20,758 |
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13,214 |
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American Funds Balanced Fund |
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25,179 |
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22,598 |
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Dreyfus Mid Cap Index Fund |
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23,509 |
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14,403 |
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INVESCO 500 Index Fund |
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25,069 |
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21,782 |
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Oppenheimer Capital Appreciation Fund |
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29,328 |
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25,614 |
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PIMCO Low Duration A Fund |
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3,893 |
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3,361 |
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PIMCO Total Return Fund |
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13,449 |
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10,925 |
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Premier Portfolio Fund |
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26,674 |
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27,290 |
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Royce Low-Priced Stock Fund |
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19,441 |
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15,496 |
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Participant loans |
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9,478 |
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9,390 |
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Total investments |
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417,510 |
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369,665 |
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Net assets available for benefits |
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$ |
422,764 |
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$ |
373,510 |
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See accompanying notes to financial statements.
4
PAYCHEX, INC. 401(k) INCENTIVE RETIREMENT PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
(In Thousands)
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For the Year Ended |
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December 31, |
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2005 |
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2004 |
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Contributions: |
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Participant |
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$ |
29,534 |
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$ |
27,473 |
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Employer, net of forfeitures |
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8,513 |
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7,691 |
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Transfers from other qualified plans |
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— |
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9,506 |
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Total contributions |
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38,047 |
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44,670 |
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Investment income/(loss): |
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Dividend and interest income |
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8,773 |
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6,099 |
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Net realized and unrealized appreciation/(depreciation) in fair value of investments |
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28,442 |
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(7,634 |
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Total investment income/(loss) |
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37,215 |
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(1,535 |
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Benefits paid to participants |
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(26,008 |
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(27,493 |
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Change in net assets available for benefits |
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49,254 |
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15,642 |
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Net assets available for benefits at beginning of year |
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373,510 |
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357,868 |
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Net assets available for benefits at end of year |
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$ |
422,764 |
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$ |
373,510 |
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See accompanying notes to financial statements.
5
PAYCHEX, INC. 401(k) INCENTIVE RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 and 2004
NOTE A. PLAN DESCRIPTION
The following brief description of the Paychex, Inc. (the “Company” or “Paychex”) 401(k) Incentive
Retirement Plan (the “Plan” or the “Paychex Plan”) is provided for general information purposes
only. More complete information regarding the Plan’s provisions may be found in the plan document
and summary plan description.
General: The Plan is a defined contribution plan qualified under Sections 401(a) of the Internal
Revenue Code (the “Code”), which includes provisions under Section 401(k) allowing an eligible
participant to direct the employer to contribute a portion of the participant’s compensation to the
Plan on a pre-tax basis through payroll deductions. The Plan is subject to the provisions of the
Employer Retirement Income Security Act of 1974 (“ERISA”).
The Plan was established on July 1, 1984 and was restated in April 2002 to include legislative
developments through the Economic Growth and Tax Relief Reconciliation Act of 2001. As part of
this restatement, the Plan was amended to operate in part as an employee stock ownership plan
(“ESOP”), which is designed to comply with Section 4975(e) and the regulations under the Code. It
is not currently intended that the Plan be a leveraged ESOP, although the Plan permits the ESOP to
borrow money to purchase ESOP stock if the employer should so elect at some future date. At
December 31, 2005 and 2004, all shares of ESOP stock are allocated to participant accounts. Under
this ESOP feature, participants are able to receive dividends on their shares of Paychex common
stock in the form of cash or have them reinvested into the Fund.
Plan Mergers: On April 1, 2003, Paychex acquired InterPay, Inc. Effective January 2, 2004, the
assets of the InterPay, Inc. 401(k) Retirement Plan (“InterPay Plan”) were merged with and into the
Paychex Plan. The increase in net assets available for benefits resulting from this merger was
approximately $9,506,000, and 400 InterPay Plan participants became Paychex Plan participants
concurrent with the asset transfer. Service time recognized under the InterPay Plan is recognized
for eligibility and vesting purposes under the Paychex Plan.
Plan Amendments: The Plan was amended twice in 2005 to allow for the changing of the Plan’s
trustee and to reduce the dollar limit on mandatory lump sum cash-out distributions from $5,000 to
$1,000. The Plan was also amended twice during 2004 to change the Plan’s treatment of certain
401(k) loan rollovers and Plan participation requirements for employees of merged companies, and
other administrative definitions in the Plan related to the issuance of a favorable IRS
determination letter. These amendments did not have a material effect on net assets or changes in
net assets available for benefits.
Plan Administration: The Plan is administered by the Paychex, Inc. 401(k) Incentive Retirement
Plan Committee (the “Plan Committee”), which is appointed by the Board of Directors of the Company.
The Plan’s trustee is Princeton Retirement Group, previously known as AMVESCAP Retirement Services
(“AMVESCAP”). The Bank of New York is the trustee of the Paychex ESOP Stock Fund. These parties
are responsible for the custody and management of the Plan’s assets.
6
NOTE
A. PLAN DESCRIPTION (continued)
Eligible Employees: All new employees of the Company and its participating subsidiaries are
eligible to participate in the salary deferral portion of the Plan immediately. Employees must be
employed for one year in which a minimum of 1,000 hours have been worked to be eligible to receive
a Company matching contribution.
Contributions: Employees may contribute, on a pre-tax basis, from 1% up to 50% of their
compensation through payroll deductions in increments of 1%, subject to the limitations established
by the Code. The maximum annual employee contribution to the Plan was $14,000 in 2005 and $13,000
in 2004, respectively. The Plan Committee may establish for any Plan year a contribution
percentage limit for highly compensated employees that is less than 50%. Employees may also
contribute amounts representing rollover distributions from other qualified defined benefit or
defined contribution plans or individual retirement accounts. The Company will make a
discretionary contribution of up to 50% of the first 6% of eligible pay that an employee
contributes to the Plan. The Company may elect to make an additional discretionary contribution to
the Plan, but has not done so for the years ended December 31, 2005 and 2004.
Additionally, participants who are age 50 or older by the end of the calendar year are also allowed
to make an additional “catch-up” contribution. This contribution was limited to $3,000 in 2004,
$4,000 in 2005 and $5,000 in subsequent years. The “catch-up” contribution is not subject to the
Company matching contribution.
Vesting: Participants are fully vested as to their elective contributions and rollover
contributions as well as any earnings or losses on them. Employees are fully vested with respect
to Company matching contributions upon completion of 1,000 hours of service per year for three
calendar years, disability, death, or attainment of retirement age, which is 65. Within the ESOP,
dividends received are fully vested, regardless of years of service.
Participant
Accounts: The trustee maintains an account for each participant, including participant
directed allocations to each investment fund. Each participant’s account is credited with the
participant’s contribution and allocations of any employer contribution and Plan earnings, less
loans and withdrawals. The investments under the Plan are 100% participant-directed. Plan
participants can fully diversify their portfolios by choosing from any or all investment fund
choices in the Plan. Transfers in and out of investment funds, including the Paychex ESOP Stock
Fund, are not restricted, with the exception of certain restricted trading periods for individuals
designated as insiders as specified in the Paychex Insider Trading Policy. The Company matching
contributions follow the same fund elections as the employee compensation deferrals.
Investment
Options: As of December 31, 2005, a participant may direct contributions in the following
investment options:
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Paychex ESOP Stock Fund |
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AIM Basic Value Fund |
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AIM International Growth Fund |
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American Funds Balanced Fund |
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Dreyfus Mid Cap Index Fund |
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• |
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INVESCO 500 Index Fund |
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• |
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Oppenheimer Capital Appreciation Fund |
7
NOTE
A. PLAN DESCRIPTION (continued)
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PIMCO Low Duration A Fund |
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PIMCO Total Return Fund |
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Premier Portfolio Fund |
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• |
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Royce Low-Priced Stock Fund |
Participants may choose to change their investment option choices and how their contributions are
allocated to each fund chosen at any time. The Plan Committee regularly reviews the performance of
all investment options and may enter or exit funds at its discretion.
Payment of Benefits: Upon separation from employment, at retirement or reaching the age of 59 1/2, a
participant may elect to receive either a lump-sum amount equal to the value of the participant’s
vested interest in his or her account, or annual installments over a fixed period of time.
Forfeited Accounts: Forfeited non-vested assets are used to reduce future employer contributions.
Total forfeitures used to reduce employer contributions were approximately $137,000 and $248,000
for 2005 and 2004, respectively. Forfeited balances not yet applied to reduce employer
contributions at December 31, 2005 and 2004, respectively, were not material to the financial
statements.
Participant Loans: The Plan allows participants to borrow from a minimum of $1,000 up to a maximum
equal to the lesser of 50% of the vested balance from their account, or $50,000 reduced by the
highest outstanding loan balance in the previous twelve months. Only one loan may be outstanding
at any time. The rate of interest is the prime lending rate plus 1% at the time the loan is
disbursed. Payroll deductions are required to repay the principal and interest on the loan within
four and one-half years, except for loans used for the purchase of a principal residence, which are
required to be repaid within nine and one-half years. Participant loans are subject to a one time
non-refundable loan origination fee of $75, and a $10 annual fee for the duration of the loan,
which are deducted from the participant’s account.
Voting and Tender Offer Rights on ESOP Stock: Each participant in the Paychex ESOP Stock Fund is
entitled to exercise voting rights on shares held in his or her account and also direct the ESOP
trustee to tender his or her shares of ESOP Stock if an offer is made to purchase such shares. If
the participant does not vote or indicate his or her preference with respect to a tender offer, the
trustee will vote participants shares and unallocated shares in the same proportion as the shares
for which the trustee has received instructions.
ESOP Stock at Time of Distribution: Under Federal income tax regulations, if ESOP stock should not
be readily tradable on an established market at the time of a participant’s distribution, the
Company will issue a put option to the participant. The put option allows the participant to sell
ESOP stock to the Company at a price that is representative of the fair market value of the stock.
If the put option is exercised with respect to ESOP stock distributed as part of a total
distribution, then the Company can pay for the purchase with interest over a period not to exceed
five years. If the put option is exercised with respect to an installment distribution, then the
Company must pay for the purchase within thirty days of the exercise of the option.
8
NOTE
A. PLAN DESCRIPTION (continued)
Plan Termination: Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the Plan subject to
the provisions of ERISA. In the event of Plan termination, participants will become fully vested
in their account balances.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting: The financial statements of the Plan are prepared under the accrual method of
accounting in conformity with U.S. generally accepted accounting principles (“GAAP”).
Administrative Expenses: Administrative expenses of the Plan are paid by the Company. The Company
paid approximately $271,000 and $257,000 in 2005 and 2004, respectively, in administrative
expenses.
Investment Valuation and Income Recognition: Investments are stated at their approximate fair
value based on quoted market prices. Participant loans are valued at the principal amount, which
approximates fair value.
Purchases and Sales of Securities: Purchases and sales of securities are recorded on a trade date
basis. Net realized gains or losses upon the sale of investments are based on their average cost.
Dividend and Interest Income: Dividends are recorded on the ex-dividend date. Interest income is
recorded on the accrual basis.
Payment of Benefits: Benefits are recorded when paid.
Contributions: Contributions from the Company are accrued for in accordance with the terms of the
Plan. Participant contributions are recorded in the period the Company makes corresponding payroll
deductions.
Use
of Estimates: The preparation of financial statements in
conformity with GAAP requires the Plan
Committee to make estimates and assumptions that affect the financial statements and accompanying
notes. Actual results could differ from those estimates.
Risks and Uncertainties: The Plan provides for certain investments that are exposed to various
risks, such as interest rate risk, credit risk and market volatility risk. The Plan attempts to
limit these risks by authorizing and offering participants a broad range of investment options that
are invested in high quality securities or are offered and administered by reputable and known
investment companies. Due to the level of risk associated with certain investment securities, it
is reasonably possible that changes in values of investment securities will occur in the near term,
and such changes could materially affect the amounts reported in the statements of net assets
available for benefits and of changes in net assets available for benefits.
NOTE C. PARTY-IN-INTEREST TRANSACTIONS
The Plan’s holdings of Paychex common stock qualify as a party-in-interest transaction. Also, all
transactions between the Plan and AMVESCAP and the Bank of New York qualify as party-in-interest
transactions. As of December 31, 2005, the Plan held 5,348,769 shares of Paychex common stock at a
fair market value of $203,877,219. As of December 31, 2004, the Plan held 5,605,684 shares of
Paychex common stock at a fair market value of $191,041,710.
9
NOTE D. INVESTMENTS
The change in fair value of the Plan’s investments, including net realized and unrealized gains and
losses, is as follows:
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As of and for the Year |
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Ended December 31, |
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2005 |
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2004 |
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(In Thousands) |
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Paychex ESOP Stock Fund |
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$ |
21,950 |
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$ |
(17,903 |
) |
AIM Basic Value Fund |
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|
855 |
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1,357 |
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AIM International Growth Fund |
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2,714 |
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2,186 |
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American Funds Balanced Fund |
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(250 |
) |
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517 |
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Dreyfus Mid Cap Index Fund |
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1,022 |
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1,265 |
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INVESCO Small Company Growth Fund |
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— |
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|
370 |
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INVESCO Total Return Fund |
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— |
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|
142 |
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INVESCO 500 Index Fund |
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1,131 |
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2,133 |
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Oppenheimer Capital Appreciation Fund |
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1,128 |
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1,552 |
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PIMCO Low Duration A Fund |
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(73 |
) |
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(13 |
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PIMCO Total Return Fund |
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(223 |
) |
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(45 |
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Royce Low-Priced Stock Fund |
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|
188 |
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|
805 |
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Net realized and unrealized appreciation/(depreciation) in fair value of investments |
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$ |
28,442 |
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$ |
(7,634 |
) |
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NOTE E. TAX STATUS
The Plan received a determination letter from the Internal Revenue Service dated May 17, 2004
stating that the Plan is qualified under Section 401(a) and Section 4975(e) of the Code and,
therefore, the related trust is exempt from taxation. Concurrent with the receipt of the
determination letter, the Plan was amended as described in Note A. Once qualified, the Plan is
required to operate in conformity with the Code to maintain its qualification. The Plan Committee
believes the Plan is being operated in compliance with the applicable requirements of the Code and,
therefore, believes that the Plan, as amended, is qualified and the related trust is tax exempt.
NOTE F. SUBSEQUENT EVENT
On or about March 6, 2006, the Company sent a notice to Plan participants that the Plan would be
changing its trustee and recordkeeper from AMVESCAP to Fidelity
Investments (“Fidelity”). Effective
May 1, 2006, Fidelity replaced both AMVESCAP as trustee and recordkeeper and the Bank of New York
as trustee for the Paychex ESOP Stock Fund. In conjunction with the transition to Fidelity certain
new fund selections and alternative investment options are available to Plan participants.
10
(SCHEDULE H, LINE 4i)
SCHEDULE OF ASSETS (HELD AT END OF YEAR)
PAYCHEX, INC. 401(k) INCENTIVE RETIREMENT PLAN
EIN-16-1124166
PLAN-0-40436
DECEMBER 31, 2005
(Dollars, Units, and Shares in Thousands)
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| Identity of Party |
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Description of Investment Including Maturity Date, |
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| Involved |
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Rate of Interest, Collateral, Par or Maturity Value |
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Current Value |
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AMVESCAP*/
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Bank of New York |
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Cash |
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$ |
5,254 |
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AMVESCAP*/
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Bank of New York/
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Paychex, Inc. * |
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Paychex, Inc. Common Stock - 5,349 shares |
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203,877 |
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AMVESCAP* |
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AIM Basic Value Fund - 493 units |
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16,855 |
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AMVESCAP* |
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AIM International Growth Fund - 884 units |
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20,758 |
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AMVESCAP* |
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American Funds Balanced Fund - 1,413 units |
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|
25,179 |
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AMVESCAP* |
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Dreyfus Mid Cap Index Fund - 841 units |
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|
23,509 |
|
AMVESCAP* |
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INVESCO 500 Index Fund - 770 units |
|
|
25,069 |
|
AMVESCAP* |
|
Oppenheimer Capital Appreciation Fund - 683 units |
|
|
29,328 |
|
AMVESCAP* |
|
PIMCO Low Duration A Fund - 390 units |
|
|
3,893 |
|
AMVESCAP* |
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PIMCO Total Return Fund - 1,281 units |
|
|
13,449 |
|
AMVESCAP* |
|
Premier Portfolio Fund - 26,674 units |
|
|
26,674 |
|
AMVESCAP* |
|
Royce Low-Priced Stock Fund - 1,252 units |
|
|
19,441 |
|
Participants* |
|
Participant loans ** |
|
|
9,478 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
$ |
422,764 |
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* Represents party-in-interest
** Loans to participants have various maturity dates (interest at 5.0% to 10.5%)
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